Economics for a New Century

05/30/2010 05:12 am ET
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Updated
May 25, 2011

Ann Lee
Author, What the U.S. Can Learn from China; Senior fellow, Demos

With personal and national debt reaching record levels and unemployment at its most severe since the Great Depression, now may be the opportunity to abandon growth economics and come up with economic models for shrinking economies. Why not consider doing more with less and returning more to the environment than taking from it? Today, more energy is consumed on a daily basis in New York City alone than in the entire African continent. U.S. per capita energy consumption is multiples of that of India and China, and if we let those two countries catch up to our levels, the world will implode. We should remember that Easter Island has no inhabitants because its population used up the arable land and eventually resorted to cannibalism. Don't underestimate the craziness of humans in desperate situations.

Growth is determined by productivity, population, and debt in America. But starting in the 1980's, productivity was largely artificially driven by increasing debt. If debt were held constant, debt-adjusted productivity has actually declined. But once we reach maximum debt, what will the driver be?

To be sure, Americans have long been optimists in believing that human ingenuity - and in particular, American ingenuity - will come up with a solution that will enable the world to continue growing as we have been during this past century. After all, the Malthusian argument that the population's exponential growth will deplete the world's natural resources has not yet materialized.

However, invention is born out of necessity, not want. The U.S. could be at the end of its innovation cycle. Throughout history, the slow decline of a nation's dynamism happens when a nation becomes fat, dumb, and complacent, and wants are mired in frivolity. For instance, big screen TV's replace education as the discretionary purchase of choice. This pattern was evident with the Romans, the Chinese, and others. When working hard will not incrementally yield much more, the incentive to work disappears.

Furthermore, the higher taxes that will certainly come in the coming decades in order to pay for the enormous debt the U.S. has accumulated will further stifle the incentive to innovate. Higher income taxes artificially stratify the classes: the wealthy will stay wealthy, and the poor will not easily acquire wealth as their productive efforts will be taxed away. After all, how does one create innovation in a socialist country?

Capitalism, as practiced in the US in the year 2010, is showing signs of strain. For 100 years, the U.S. was the only place in the world that was truly the land of opportunity. It has stopped working because of the creation of an entitlement mentality that seems to pervade public sector and private sector workers and consumers. There are too many generational transfers of wealth, and the progeny of the wealthy typically have not been the best allocators of capital. The excess of the Hamptons is exhibit A. At the same time, taxation, and the burden on state governments imposed by public sector unions, has increased. In 70 years, the U.S. has gone from having no income tax to a 48% tax rate on the highest earners. The result is too much pork and inefficiency which all chokes out innovation. We have too much establishment protecting their own friends who run institutions that are complacent and have run its course. Directors of major corporations are re-elected, and chief executives are highly compensated, without regard to their company's performance. Innovation by definition upsets established institutions and plays a critical role in the reinvigoration of an economy. But the recent bailouts of all the large banks and auto companies are policies that kill innovation and cheat the younger generation from having a chance at wealth. The U.S. is reverting to employment by "who you know" as opposed to merit. Those who are most connected are not fired. The free market, as a result, is broken.

The U.S. needs to get religion in the form of a new economic ideology to realign our priorities. Instead of tracking growth statistics and other economic data, we can start by figuring out a way to measure and report such things as human dignity, creativity, and degrees of freedom, and reward behavior that enhances those values we cherish. It does not make sense that most artists, teachers, and doctors - those who deliver the greatest value to society - are the least paid individuals, while investment bankers and speculators who earn the most amount of money are adding minimal value to society at best, and at worst, destroying value. We ought to find the political will to start funding research in universities that support a new way of thinking about economics

In 1973, in the midst of the energy crisis, an economist named E.F. Schumacher published a book called Small Is Beautiful that challenged the conventional wisdom of growth economics and received widespread acclaim during a similar period of economic uncertainty. However, his theories and arguments have been all but forgotten in recent decades, as notions of greed and consumption have been promoted by big business, policymakers in government, and taste makers in the media. His ideas are certainly worth revisiting.